markets

After 3,800% Rally, CEO of Brazil Retailer Says It's Still Cheap

  • Magazine Luiza has surged in past several years under Trajano
  • Market starting to price closer to e-commerce competitors
Magazine Luiza CEO Frederico Trajano discusses the retail landscape in Brazil.

When Frederico Trajano took over Brazilian retailer Magazine Luiza SA in January 2016, shares traded at just 1 real and investors of the 60-year family-owned company were punishing the retailer amid a brutal recession.

Frederico Trajano

Photographer: Patricia Monteiro/Bloomberg

Since then, the stock has surged an astounding 3,800 percent to a record 85 reais ($26.85) and Trajano says that when comparing to local and global competitors in the electronic retail space, it’s still undervalued as it grows in both online sales and opens new brick and mortar stores across Brazil.

The stock in terms of price per earnings and other metrics is "far away from Amazon, MercadoLibre, from stocks that are perceived as tech stocks so I see room for improving," Chief Executive Officer Trajano said in an interview in Sao Paulo on the sidelines of Credit Suisse’s annual Latin America investment conference. "Especially now that we are in a good economic environment," he said, citing lower inflation and potential sales driven by the upcoming World Cup.

In fact, the numbers show that Magazine Luiza has a revenue growth and profit that more closely resembles a technology company than a traditional retailer. When compared to global department stores, Magazine delivers the best return on equity at 34.5 percent, also above the e-commerce competitors median at 22.2 percent.

While the stock took a hit last year around announcements that Amazon would be growing in Latin America’s largest economy and competing in some spaces, Trajano says the company’s strategy won’t change and a mix of physical stores and online purchases with centralized distribution centers is the best formula in a country like Brazil. Shortcomings in infrastructure make same-day delivery extremely challenging and many customers -- about two thirds of e-commerce shoppers -- are buying online and picking the products up at stores. All the more reason to open more, he says.

“I don’t see any online only pure player in Brazil making money and they do sell but they don’t make money, they burn a lot of cash, so the best model to do is through an omnichannel with a little bit of human warmth which is very important for Brazilians,” the 41-year-old Trajano said. “Brazil isn’t for beginners.”

Among the peculiarities in doing business in the $1.8 trillion economy, he highlights the very complex tax system, as well as unreliable logistics infrastructure and very fierce competition.

For now, investors looking to pile into the company will have to do so in the local shares traded on the Ibovespa. After raising more than 1.5 billion reais in a follow-on sale last year, Trajano has no need or plans to list in New York or sell foreign currency bonds, he said.

— With assistance by Fabiola Moura

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